Uninsured Subcontractors – A Common Workers Compensation Audit Problem

The use of uninsured subcontractors is a constant source of problems when it comes to workers compensation audits and their outcome. There’s a great deal of confusion surrounding this situation and most of the time the facts don’t come out until after an audit is completed and the insured employer receives a large additional premium bill.

We receive at least two calls a day from contractors inquiring if their insurance company can really do this. And most of the time the answer is “yes they can!” I’ve written about this situation many times in the past and evidently will continue to do so as long as this problem exists!

Here’s a simple rule:

  • If you hire an uninsured subcontractor, one who does not have workers compensation insurance coverage, your policy will pay for his injuries and your insurance company will charge you additional premium.

Now there may be some specific situations where this rule would not apply…but if you follow this basic rule…at least you’ll not be surprised at audit time!

Something that always confuses the situation:

  • Exclusion of individuals or sole proprietors – When in conversation with a new client who has fallen into this audit trap they almost always recite “but he’s a sole proprietor and doesn’t have to carry workers comp.” That may be true! But when he’s doing work for you, most of the time, he becomes known as a statutory employee. The rules that apply to him individually do not apply to another party hiring him to do work. And if your insurance company would have to pay a claim for his injuries, then they are allowed to collect the proper premium. In some states independent contractor status is allowed but is governed by very specific rules which may include licensing and filing with the state. So just because he’s a sole proprietor who may not be required to carry workers comp on himself doesn’t mean you’re free and clear!

An update to this post. I originally wrote this article on August 9, 2012. Today is March 3, 2021. And this problem of using uninsured subcontractors continues to cause many experienced employers a great deal of trouble when audit time comes around. I recently posted a new blog about this very problem. Be sure you go to it and check out the recent example of a hiring contractor who fell for the exact thing I was talking about above. In a nutshell, the contractor hired a sub who told the hiring contractor they were not required to carry workers compensation insurance and the hiring contractor actually believed him. That trust costed the hiring contractor over $18,000 in additional premium.

The reasons this continues to happen are varied and never cease to astound me! The simple fact that a subcontractor may not be required, under some state statute, to carry workers compensation coverage on himself does not eliminate the situation that when you use an uninsured subcontractor you are responsible for injuries they incur. Now temper that statement with a grain of salt considering that maybe in your specific state some other rules may apply. But in general, if you use subcontractors, the best way to protect your company from incurring an unexpected large workers compensation additional premium at audit is to only use insured subcontractors. More importantly, you need to become familiar with the rule that applies in your state. You need to know for a fact how to handle this situation.

Here it is almost nine years after I originally posted this blog and the simple rule I outlined above still applies! 

So when using uninsured subcontractors beware! If not handled correctly you will more than likely be faced with paying additional premium for your workers comp coverage at audit time! Do your homework! Don’t be surprised!

Hope this helps you out! T

Stay safe and thanks for reading